Regular readers will have noticed the sharp recent reductions in wholesale swap rates, especially for 1 and 2 year durations.
But neither home loan rates, nor term deposit rates, have moved in the same direction after the wholesale rates peaked in early October.
Swap rates and term deposit rates both have an influence on the mortgage interest rates offered. Customer deposits (which include much more than household term deposits) are the main funding source for home loans, and the wholesale markets also have a strong influence, especially in their role to hedge the 'borrow short, lend long' risks that banks face.
The dive in wholesale rates, driven by global forces especially out of the US where inflation's impact seems to have passed (and the US Fed is no longer under pressure to raise rate), has sharply raised the margins on home loan rates.
Margins to swap have risen to their highest in 2023, and may now be heading back over 2% and the sort of levels that were 'normal' from the GFC to the pandemic. We are possibly coming out of an unusual two year period of low margins to swap.
But holding mortgage rates up will be much higher term deposit rates, at levels we haven't seen since November 2008, 15 years ago. These currently have the dominant influence on home loan rates.
But if term deposit rates fall in line with recent global rate shifts, then some chunky opportunities for lower mortgage rate offers could open up.
Wholesale markets currently price in an OCR rate cut in the middle of 2024. Yes, a -25 bps cut. ANZ economists recently abandoned their view that the RBNZ has one more +25 bps rate hike in mind in early 2024 in the face of the money market realities.
Banks will be reluctant to give up the margin improvements. After all, the ASB parent company recently complained about the 'very low' mortgage margins in New Zealand. And the ANZ parent company skited about their dominant position saying they didn't have to offer 'best rates' because of this dominance.
However if lower global rates embed and are reflected here, one of the big banks is likely to move lower in their retail offers. We will probably see that first with shifts lower in term deposit rate offers. BNZ's current 6.25% one year term deposit 'special' (which expires on November 26) may well be the high point for a while from a main bank.
And if TD rates start dropping and stay lower while background benchmark rates also stay lower, then lower home loan rates are sure to follow. Certainly, there is no demand pressure in our housing markets to keep them up. And after all home loan lending is where the main demand pressure comes from in New Zealand and that pressure isn't building because the 2023 spring housing market is turning out to be something of a damp squib.
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Those that said it would be anything other than a 'damp squib' never, not even once, had any serious, nor realistic, nor believable analysis or reasoning to back it up.
And the loudest voices talking this nonsense have been those who operate for profit, and therefore far from impartial and yet they pretend to be (ComCom take note), but are reported and echoed ad nauseum. NZ's property information market is a mess.
Really? Most seem to say the opposite! Retired Poppy, Dgm, and many others have had opinions predicting drops in home values and sales. On guy (forget his name) keeps banging on about a 50% drop in house values, and many talk about a dead cat bounce or other such idioms.
Let's start with bank economists at Australian banks, and then move onto the foolishness and shortsightedness of NZ's voters and the purple parties and their ignorance (real or by pretense) as to why NZ's tax system needs a massive overhaul.
(Should keep us busy all weekend ...)
Swap rates and term deposit rates both have an influence on the mortgage interest rates offered. Customer deposits (which include much more than household term deposits) are the main funding source for home loans, and the wholesale markets also have a strong influence, especially in their role to hedge the 'borrow short, lend long' risks that banks face.
The interpolated mid IR swap rate, for last Thursday's 2.0% 15/05/32 government tender yielding 4.9681%, was - minus 14.35 bps at 4.8246%.
Quite simply, it takes some financial institution’s balance sheet capacity to take on an interest rate swap (the farther the maturity, the more capacity it requires). If balance sheet capacity (the real money in the system, therefore liquidity) is systemically impaired, as in a crisis, or a crisis that doesn’t really end, then to get dealers to give up their precious balance sheet capacity and engage on the other side of a swap someone would have to pay a hefty premium to make it worth it (risk-adjusted) for the dealer to do so. J Snider
Bank money creation hard at work. After all, one person's approved and issued bank mortgage is another person's receipted funds allowing settlement of the sale and purchase agreement - funds which go straight into an interest earning bank account more often than not.
If by "fiscal stimulus" one includes the OCR back below 2.0% then I'm pretty sure it'll happen much sooner. Technically, what the RBNZ does isn't "fiscal" though.
And if you're taking true fiscal stimulus, where governments adjust spending and/or tax settings, I'm sorry to say you'll be wrong by early next year. (I refer of course to the NACT tax cuts.)
Further, are you suggesting that they'll never be an event, in the next 20 years (remember we live on a fault line) that will require it? Huge call.
If you're saying that there won't be another event that requires the scale of quantitative easing and/or fiscal stimulus we saw as a response to an event like covid, you may be right. ... Methinks all central banks consult the text books that refer to the RBNZ's actions that threw money into a massively supply constrained economy and they'll conclude that it'd be pretty dumb.
Still, other events, GFC 2.0?, could warrant it. Likewise a collapse of the internet. Or an alien invasion ;-)
Yes ANZ made a good early call on this big shift in swaps last week. If these swap rates do hold lower over the next month or so then the 3 to 5 year TDs could be the first to move down. Short term at the 1 year, it all comes back to the RBNZ. I think they will be very reluctant to move the OCR until at least March next year knowing well New Zealanders addiction to the property market and wealth effect spending.
Dan Brunskill did a great article on what the market was predicting ... Published 2nd Nov 23.
https://www.interest.co.nz/bonds/125053/market-expectations-official-ca…
The graph at the end of the article can be created at any point of time.
re ... "I think they will be very reluctant to move the OCR until at least March next year knowing well New Zealanders addiction to the property market and wealth effect spending."
Maybe. Maybe not.
Don't forget that the RBNZ focus is on financial stability and controlling inflation. Thus they only move when either, or both, are threatened. If neither are, the OCR can come down as it costs NZ Inc a fortune to hold it high. Further, DTIs are on the cards to be implemented, if Prince John allows it that is. And a DTI will have a restraining effect (at the right level).
I'd agree March is probably the earliest we'll see an OCR cut. (Jfoe is picking May and I think he's most likely to be right.) A small cut before then is a remote possibility (but IMO a small cut earlier, possibly followed by another, is an absolute necessity). By March the info for a woeful Christmas will be stark. Alas, a small cut then will be too late and a larger cut will, as you say, send exactly the wrong message.
Interestingly, a UBS economists is predicting a whole 1% cut in the last four months of 2024, from 5.5% to 4.5%. That would be a signal that the RBNZ has, once again, got it badly wrong.
RBNZ are going to use DTI, LTV etc to try and steady the housing market
The main catch is to reduce the leverage of investors, ie. How they use their unrealized valuation of existing properties (equity??) and using it as deposit for next purchase
Need better restrictions to stop this ponzi. If they have enough bank deposit, let them go and buy more, no problem.
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